迪士尼 (DIS) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth-quarter and fiscal year-end 2004 earnings conference call. (OPERATOR INSTRUCTIONS).

On today's conference call we have the Executive Vice President and Chairman -- sorry, Chief Financial Officer Simon Bax and Chairman and Chief Executive Officer Steve Jobs.

Here now is your first speaker, Mr. Simon Bax.

Please go ahead.

Hello and welcome to Pixar's conference call for the fourth quarter and fiscal year-end 2004.

Before I begin a formal discussion of our financial results, I need to remind you that some of the statements made throughout the course of this presentation are forward-looking, and it is possible that actual results will differ materially.

Among the factors that could cause these results to differ are timing and amount of worldwide revenues and distribution costs related to our film, and the timing, accuracy and amount of information received from Disney and other sources to determine revenues and associated gross profits.

These forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date they were made.

Additional information concerning these and other factors that could cause results to differ is contained in our 2003 Form 10-K, third-quarter 2004 Form 10-Q, and our other filings with the Securities and Exchange Commission.

I will now review our full year and fourth-quarter 2004 results, followed by a discussion of our guidance for the first quarter of 2005, along with our key assumptions for the full year.

I'm pleased to announce that revenues for our 2004 fiscal year were 273.5 million, net income was 141.7 million and diluted earnings per share were $2.38.

In fiscal 2003 revenues were 262.5 million, net income was 124.8 million and diluted earnings per share were $2.17.

Our 2004 results exceeded our previous guidance for the year of between $2.10 and $2.20, and I am proud to report that 2004 was Pixar's most profitable year to date.

For the fourth quarter, revenues were 108.9 million, net income was 55.2 million and diluted earnings per share were 91 cents.

These results compared to revenues of 164.8 million, net income of 83.9 million and diluted earnings per share of $1.44 reported in the fourth quarter of 2003, the period in which we released Finding Nemo on home video in the U.S..

Film revenues for the fourth quarter were 105.6 million, which included 40.4 million for The Incredibles primarily from the film's worldwide theatrical release, together with associated consumer product sales.

These revenues were offset by some initial upfront worldwide home video marketing and release costs.

By the closing day of our fourth quarter, which ended on January 1st, 2005, The Incredibles had generated approximately 530 million of worldwide box office receipts.

Since then the total worldwide box office has risen to approximately 617 million, comprised of 258 million from its domestic release and 359 million from its international relators.

Revenues from Finding Nemo in the quarter were 38.4 million, mainly comprised of worldwide sales of home video and consumer product.

In this period, we reduced our domestic home video return reserved for Finding Nemo, following our review of the most recent sell-through and inventory information obtained from Disney.

We also reduced our estimated domestic home video marketing expenses to conform to changes that Disney had made in how it estimates these costs.

By the end of the fourth quarter, we had recognized Nemo home video sales of approximately 48.6 million net units worldwide, of which 75 percent were DVDs.

In the U.S. we also benefited from significant margin improvement for Finding Nemo relative to Monsters, Inc. due to both higher unit sales, as well as the increased proportion of DVDs relative to VHS.

Looking ahead we would expect this margin improvement to apply to the home video release of The Incredibles as well.

Taken together the reduced domestic home video return reserve and lower domestic marketing expenses resulted in fourth-quarter revenues of 22.7 million or 22 cents per fully diluted share.

Our remaining film revenues contributed 26.8 million this quarter and were driven primarily by domestic network television revenues from Monsters, Inc. as well as contributions from worldwide home video sales, consumer product licensing and international television sales of our lively titles.

In addition to film revenues, software licensing contributed 3.3 million to our net revenues for this quarter and 12.6 million for the full year.

Operating expenses for the fourth quarter were 11.4 million compared to 6.8 million for the corresponding period last year.

The majority of the increase in operating expenses over the prior year period was due to an employee bonus in recognition of their contribution to the success of The Incredibles.

The increase also reflects the ongoing growth of the studio, as well as our increased proportion of operating expenses previously borne by Disney.

For the full year, we generated revenues of 150.8 million from Finding Nemo.

This represented 55 percent of our total revenues, the majority of which was from home video and consumer products.

Revenues from The Incredibles made up 15 percent of our 2004 total, mainly from worldwide theatrical rentals generated from its release in the fourth quarter.

The remainder of our film library contributed 25 percent to total revenues throughout the year, underscoring the long-term value of these highly successful franchises.

The overall tax rate for fiscal 2004 was 35.9 percent, which reflected the utilization of certain tax benefits related to the international income exclusion for the years 2000 through 2004.

Although we expect some benefit in 2005, tax code section governing the exclusion has now been amended, which will reduce the level of benefit in future years.

Cash, cash equivalents and investments were approximately 855 million at the end of the year or over $14.60 per fully diluted share.

This represents an increase of 333 million over our 2003 year-end balance.

This was mainly attributable to cash received from Disney for our share of film revenues, as well as proceeds from stock option exercises offset by film production costs, taxes and capital expenditures.

Capitalized film costs at year-end were 140 million versus 107.7 million at the end of 2003, reflecting production spending on our work current film projects offset by film amortization of 28.5 million.

Our balance sheet remains debt free, and our shareholders equity at the end of the fourth quarter was in excess of 1.2 billion.

I would now like to address the events that are to reflected in our results for the first quarter of 2005, as well as introduce our initial thoughts on the full year.

We anticipate our earnings for the first quarter to be driven by the continuing success of The Incredibles, particularly its home video release which is slated for March 15th, 2005 in the U.S..

This is the first time since A Bug's Life in April of 1999 that we have released one of our films on home video outside the holiday period.

But preorders of The Incredibles home video indicate that its domestic release will be equally as successful as that of Monsters, Inc.

During the initial quarter of that film's domestic home video release, we recognized sales of approximately 15.5 million net units.

We also expect initial international home video revenues in the first quarter, most notably from the UK, Italy, Spain and Mexico where The Incredibles home video is scheduled for a release throughout late March.

We anticipate that a portion of these international home video revenues will be offset by certain marketing and release costs in markets where it will be released in subsequent quarters.

Our box office projections assume The Incredibles will achieve a worldwide growth of more than 625 million, making it our second most successful film at the box office after Finding Nemo with the remaining worldwide box office receipts being recognized almost entirely by the end of the first quarter.

In addition, we expect to recognize continuing revenues from consumer product licensing, international television and worldwide home video sales.

Taken together, we expect to report diluted earnings per share for the first quarter of 2005 of between 85 cents and 95 cents.

Looking ahead we expect continuing international home video revenues from The Incredibles to drive our results for the second quarter, particularly from its release in Japan, France, Germany and Australia.

Revenues from domestic pay TV licensing of the The Incredibles are expected in the third quarter, domestic free TV licensing of Finding Nemo in the fourth.

Worldwide consumer product licensing and home video sales from our film library are likely to continue throughout 2005.

In conclusion, 2004 stands out as our most successful year thus far.

We posted record results that highlight a number of significant achievements.

First, The Incredibles, our studio's sixth film, was released during a highly competitive holiday season and is expected to generate over 625 million at the worldwide box office.

Second, the continuing success of Finding Nemo illustrates the value of our films on DVD, the most profitable segment of the film business.

And third, the solid performance of our library titles which delivered one-quarter of our revenues this year demonstrates the evergreen value of our film properties.

We expect this momentum to carry us into 2005 with the upcoming release of The Incredibles on home video and in 2006 with the release of Pixar's next film, Cars.

So for more on these and other developments at Pixar, I would now like to turn the discussion over to Steve.

Thanks, Simon.

As Simon reported, 2004 was the most successful year in our studio's history with over 270 million in revenues and over 140 million in profits.

We exited the year with over 850 million of cash in the bank and zero debt and expect to have over 1 billion of cash by the end of this year.

We learned and accomplished a lot in 2004, and I would like to review some of that with you now.

First, with the remarkable success of The Incredibles, our studio is now six for for six, both financially and critically.

To date the The Incredibles has grossed over $620 million worldwide and has garnered 10 ANI awards and four academy award nominations, including best animated feature film and best original screenplay.

To date our six films have earned an average worldwide box office of $535 million each.

There remains no other studio with this track record.

Second, in terms of the ancillary rights to our films, the most financially lucrative is videogames.

Last year we announced that we had chosen THQ as our post-Disney game partner.

We already have a lot of experience working with THQ on the games for Finding Nemo, The Incredibles and Cars, and they are doing a terrific job working closely with us to create fantastic games for our films.

To date they have sold over 7 million units of their Nemo games and over 4 million units of their The Incredibles game.

And their game concepts for Cars look great.

THQ's terrific performance on these gains makes us feel really good about our choice of a very important partner.

Third, we made the right decision to move our films to the summer release window.

Since our last earnings call, we now know that the domestic box office of The Incredibles, the best reviewed film of the year, will end within 2 percent of that of Monsters, Inc., further reinforcing the fact that the summer release window with its superior intra-week box office potential is the right time of the year to release our films.

Although we have delayed the release of our next film, Cars, by around six months to affect this change to a summer release schedule, we are on track to finish Cars on its original schedule later this year.

We think Cars is a summer movie if there ever was one and will do very well in the summer 2006 release window, and that all of our studio's future films will benefit by this move from holiday to summer.

Fourth, Pixar's brand continues to grow and prosper.

We have always placed a high-value on building our brand.

We have always believed that our brand is a reflection of our audience's trust in us to deliver them satisfying entertainment.

That is if they love one or more of our films, they are likely to trust us to deliver more of the same in the future and, therefore, are far more likely to see our next film.

Well, it is working.

The most recent brand channel survey was released earlier this month, and the five most influential brands in North America are Apple, Google, Target, Starbucks and you guessed it, Pixar.

Being ranked as the fifth most influential brand in North America in the company of these other amazing brands is hard to believe.

But then again over a 25 million people in the U.S. experience each of our films in theaters and even more on DVD, and we have been releasing our films for 10 years now since Toy Story in 1995.

To us this amazing result is testament to two things.

One, quality pays off.

And two, audiences can tell the difference.

Fifth, as you know we have made the decision to not actively participate in creating sequels to our films co-financed by Disney.

Here is our logic.

Pixar has released three films subsequent to our only sequel, Toy Story 2, and all three of them Monsters, Inc., Finding Nemo and The Incredibles have grossed more than Toy Story 2 at the box office.

Pixar has clearly proven its ability to create original stories that can perform as well if not better than our sequels.

We face a simple choice for our post-Disney future.

Do we fill the precious slots in our production schedule with sequels with which we will earn only 50 percent of the profits from what, which we will never wholly owned, and which will be forever controlled by Disney, or should we fill them with new original Pixar films, which we will earn 100 percent of the profits from, which we will fully own and control?

It is not hard answer.

That is why we have declined to make sequels under the terms of our current Disney agreement, and we are confident that this is the right decision for the future growth of our studio.

Sixth, our investment in developing our creative talent is paying off.

Let me talk a bit about what we're working on.

Cars, our studio's seventh feature animated film, directed by John Lassiter and starring Owen Wilson, Paul Newman and Bonnie Hunt is turning out super well.

Cars will be finished this year and released on June 9, 2006 in the U.S..

It is the most visually rich film we have made to date with amazing and enduring characters and a fantastic story.

We are all very excited about Cars.

Cars will be the seventh and final film we will likely make for Disney.

For 2007 and beyond we now have eight directors developing amazing new films, filling our pipeline with original wholly-owned Pixar franchises for our post-Disney era.

The first of these is already in production and is slated for release around 12 months after Cars in the summer of 2007, and we are planning to release a film each summer after that.

We will be telling you about about some of these films later this year.

The key takeaway here is that the creative talent at Pixar is blossoming, and they are creating some of the best stories and characters we have ever seen.

This has not happened overnight.

Next year is Pixar's 20th anniversary, the 10th anniversary of Toy Story, and our 10th anniversary as a public company.

Developing talent takes time.

Quality takes time.

But the rewards can be timeless as many of our films will live on long after we are gone, renewing themselves with each generation.

So in closing please let join me in congratulating all the members of Pixar for creating The Incredibles, our studio's sixth blockbuster in a row and on Pixar's 2004 financial results, the best in our studio's almost 20-year history.

So let's open it up for questions.

(OPERATOR INSTRUCTIONS).

Michael Savner, Banc of America.

Two questions.

First, Steve, this is a subtle point I guess, but when you say you are still on track to finish Cars as planned for I guess November, will you actually deliver Cars to Disney in November, or will you continue to hold it up until before the release and tweak it if necessary?

And the second question, again kind of a subtle nuance of what you just said, would you consider any passive role with Disney if they were to go ahead with sequels without doing full participation, meaning as a consultant or an advisor and maybe dedicating a few people?

To answer your first question, I believe -- I'm not sure, and we can get back to you on that.

I assume we're going to deliver the film as soon as we are done, but we will check on that and get back to you.

And one of the reasons to get it done is so that our team can go on to their next project.

So tweaking it after it is finished would not be productive.

I think in terms of our creative point of view I think we're going to make the films or we are not going to make the films, and we have elected to not make them.

So I don't think we will be having any involvement with them.

Jessica Reif Cohen, Merrill Lynch.

Steve, you mentioned that you have eight directors who are trained by the Company, all creative and obviously incredibly capable.

So the question is, why don't you do more than one film per year with that many directors?

Well, you know, the future is long, but right now we are just trying to build a very solid pipeline for a great Pixar film every year starting in 2007 and beyond.

And when we are comfortable that we have done that, you can bet we will be having some discussions internally about what to do with the rest of the creative bounty that we may have.

But one foot in front of the other.

And then one more question.

Consumer products, do you think that you will be affected by the sales of -- by Disney's sale of their stores?

Their stores have actually comprised a very small part of the consumer products revenues that we have enjoyed in the past.

We assume we will continue to work with the stores.

Lowell Singer, SG Cowen.

I have two questions.

First, Steve, for you, it was about a year ago that you announced you were ending talks with Disney on the distribution partnership (inaudible) of your deal in moving on.

While you're clearly not pushing up against a deadline, why have you not signed a deal yet, and what are the gating items that you're waiting to see before you do?

And is the Disney CEO search one of those items?

And then, Simon, for you I'm trying to understand why our EPS estimates have been consistently light, and I wonder if we have been underestimating the nontheatrical revenue buckets.

So I'm wondering if you can give us a sense of what a film's revenue is for, let's say, Finding Nemo by bucket?

So the theatrical, home video, TV, merchandising.

I know you have shown the data in the past, and I just wonder if the nontheatrical bucket has simply become a larger percentage of the overall revenue for a film.

Thanks.

Well, let me take the first part of that question.

Though it is likely we will not forge a new relationship with Disney beyond our current deal, we clearly have slowed down the process of picking a new partner to see how this game of musical chairs will end you know and who the new CEO Disney will be.

That could somebody from another studio, which could affect the desirability of another studio in our eyes.

So you know I think we have slowed things down, and it sounds like we're going to know how this all turns out within not that many months from now.

We have the time to take our time and wait and see and make the right decision for our studio.

On the second part of the question, it is always difficult to be estimating films like Nemo and The Incredibles, which our films that are two of the highest grossing films in history.

So going into these, we try and be conservative in terms of what their performance will be.

As we said in the call, in Nemo we are now at over 48 million units.

That is an extremely large number, and it is generating a lot more revenue than our films in the past have performed.

I also mentioned in my script we saw margin improvement on Finding Nemo.

So these are having an effect.

I cannot give you precise buckets, as you said, by revenue line item, but clearly the video piece for Nemo was significantly larger than initial estimates back a year ago.

Has the merchandising component of each film, has that gotten bigger over time, or has that number been flat sort of from the Toy Story days through The Incredibles?

Toy Story was clearly a huge consumer product film, Toy Story and Toy Story 2.

Nemo started actually much slower than we thought.

Because of its enduring appeal and success around the world, you know we have seen -- we have increased our estimates for consumer products over the last few months, as has Disney.

(OPERATOR INSTRUCTIONS).

Kathy Styponias, Prudential.

I actually have three questions.

First, Steve, can we take it from your comments that any proposal that you might have received from Disney on Monsters, Inc. and Nemo sequels have been officially rejected by Pixar?

And then the second question is, given the value of your brand as indicated by the survey that you cited, can Disney use your brand to co-brand the film, the sequel films, or do you have rights to prevent that?

And third and finally for you, Simon, I'm wondering when you're going to adopt stock option expensing and whether there will be a change in how you compensate employees going forward, i.e. will you use restricted stock instead of stock options?

Thanks.

Let me answer the first part of that question.

We have officially passed on actively participating on the sequels to Monsters, Inc. and Finding Nemo, and Disney does not have the right to use our brand in the marketing of those films.

And on the third part of your question, we intend to implement the stock option expensing in the third quarter of 2005.

And will you continue to use options, or might you use restricted stock instead?

At the moment, we are evaluating that, but we assume we will continue to use options.

David Miller, Sanders Morris Harris.

Steve, first of all, congratulations on the stellar numbers.

About two quarters ago you mentioned that in a possible development of a new coproduction deal post-Cars, that the three studios you would highly consider would be Time Warner, Fox and Sony just given their prowess overseas and their ability to effectively distribute films overseas.

In a new Brad Grey-led Paramount, he has made it a mantra of his indoctrination, if you will, to kind of beef up the international infrastructure of that particular studio.

Given that, is Paramount now under consideration post-Cars, or do you feel at this point that the three studios that you mentioned before are still the front runners?

Thank you.

You know, we haven't really ever talked about front runners, and I would rather not get into that now.

But what you mentioned is a perfect example of some of the musical chairs that have been happening this year at many of the studios and you know could continue with a selection of a new Disney CEO.

So it is usually good to make a very important decision no sooner than you have to so you can make it on the latest available information.

Anthony DiClemente, Lehman Brothers.

Just a couple of questions.

Do you have any ongoing strategy as to things you are doing, new initiatives to continue to make the most of your existing franchises, high-definition DVD being a question that I have?

And then secondly, any updates on what to do with the big cash balance, uses of that cash balance?

And secondly, any updates on thinking around splitting the stock?

Thanks.

Okay.

Let me take the first few of those.

In terms of high-definition DVDs, you know once the industry settles on hopefully one standard rather than two for high-definition DVDs, we think that format could begin to takeoff in the 2007 timeframe, 2008 timeframe.

Once there are enough high-definition DVD players in homes, we think it will be fantastic for our film library to be re-released in high-definition DVD.

As you know, since our films are produced entirely digitally, we have all the bits to provide stunning high-definition DVDs.

So at the right time, we will be there, and I think we will be putting out a tremendous product.

What do we want to do with our cash balance?

We want to let it sit in the bank and not burn a hole in our pockets because as we negotiate with a new partner not too long down the road, we would negotiate from a pretty strong position of strength.

We can fund our own films and really fund whatever we want with that cash balance.

So our business is -- our films are expensive, and having the money in the bank helps a lot.

Stock split?

You know, people give us advice on splitting the stock from time to time and you know we talk about it from time to time, but we don't have anything to announce today.

Richard Greenfield, Fulcrum Partners.

A question for Steve.

Disney management recently answered a question I asked at their Disney analyst meeting down in Orlando by indicating that the animation of humans from Disney/Pixar films was "pretty pathetic" related to their Rapunzel movie that they are working on.

I was hoping to get your reaction to that statement, and if it in anyway impacts your thought process related to a new distribution agreement with the Walt Disney company?

Well, you know I know our films don't stack up against films like Atlantis or The Emperor's New Groove or Treasure Planet, but we just kind of wrote that off to Michael being a loose cannon.

Thanks very much.

Ralph Shakert (ph), William Blair.

Good afternoon.

Can you comment a little bit on DVD wholesale pricing, how you think it stacks up for The Incredibles relative to Finding Nemo, and then also too can you talk about any effects of foreign exchange during the quarter?

On DVD wholesale pricing, we're not seeing any reduction in DVD wholesale pricing.

So I think we are fortunate maybe that our movies command sort of the top end of the pricing.

In terms of foreign exchange, clearly there has been some benefit over the last few months with the decline of the dollar, probably added around 10 percent to our box office.

William Drury, CSFB.

Debra Schwartz.

When you think about the performance of The Incredibles internationally, which was very strong, so congratulations, but I was just wondering if there are any territories that you see a potential upside from with the release of Cars or the films post-Cars?

Well, I think The Incredibles did really well internationally.

It did -- in Scandinavia and Germany, it was like Monsters, Inc.

It carried an eight rating.

So the film obviously could not -- you could not take young children to see The Incredibles, and Cars will be rated the equivalent of the U.S.

G, so that should probably help us in a couple of those markets.

Otherwise, I don't expect to see any major difference.

Spencer Wang, J.P.

Morgan Chase.

Just a follow-up on the question on foreign currency, Simon, the 10 percent uplift to box office, is that relative to where you thought it would come in, or is that relative to some other metric?

And also just in terms of the reversal of the home video reserves, was that something that was budgeted for, or was that the large reason for the upside in the quarter?

Thanks.

First on foreign currency, that is really what we -- that was an uplift from where we thought it would be.

And on the video reserve, clearly we looked at what the sales were of Nemo through the end of the quarter and felt that it has been fully so well that we reduced the reserve.

Peter Mirsky, Oppenheimer Funds.

Just to beat a dead horse on the foreign currency issue, can you just compare maybe versus Nemo or versus Monsters what the box office admissions were overseas?

I don't have that information by country.

But overall -- would you have it overall?

I can get back to you on that, but I don't have it with me.

Gordon Hodge, Thomas Weisel Partners.

This is Lauren (ph) dialing in for Gordon.

I had a question on the P&A trends and how they have been looking relative to Nemo for The Incredibles whether they stayed relatively steady or whether they have gone up, and you can answer for both theatrical and video, please.

P&A trends were fairly consistent with the spend that we had in Nemo, and it is what we highlighted last quarter.

On the DVD again, we don't anticipate any major change.

As I mentioned in my script, we did see an improvement in the domestic margin for Nemo, and we would anticipate that we would see a similar margin for The Incredibles.

Robert Routh, Jefferies.

Just two quick questions.

First, Simon, you gave us what expectations were for the first quarter of '05 between 85 and 95 cents, but I don't think or I might have missed it -- you did not give any guidance for the full year in terms of expectations for '05, and I am wondering if you could give us some kind of range as to what you expect earnings per share to be for the full year?

And second, I'm wondering if you could give us an update on the Toy Story moratorium that is currently in effect and when you think that may be ending?

At the moment, we are just going to give guidance for the first quarter, and we are going to see what the -- obviously starting March 15th we've got the DVD release throughout the world.

So later on this year I will give guidance as to later quarters and potentially the full year.

On Toy Story, we are talking with Disney about a rerelease of Toy Story to coincide with our 10th, 20th -- 10th anniversary of Toy Story and 20th anniversary of Pixar.

Dennis McAlpine, McAlpine Associates.

If you let at the success apparent any way of Polar Express in the 3-D market, what does that do to your thoughts about making your films available on a 3-D basis?

And then second, if you have eight producers now working on different projects, how many of those are greenlite, and if you're only doing one a year, that means that somebody is going to be way off in the future.

How do you keep them happy and content for eight years?

We will be talking about some of these films a little later on in the year, and at that time, we will be glad to fill you in which ones are greenlite and -- so we will hold that maybe for another quarter conference call.

In terms of having eight director's working, it is really great to have more things in development than we may need to fill up our pipeline at one a year.

But that does not mean that they are all going to be successful in development.

It means we may have some things to choose from.

And if it gets to the point where we have so many things to choose from that we cannot make all the films we want to make at one a year rate, then we will discuss doing something differently.

But again we are going to go a step at a time.

The most important thing to us is quality, so we're going to get on a sure footing at one Pixar quality film a year, and you know then all sorts of discussions are possible.

In relation to the IMAX 3-D, I think Polar Express clearly was very successful as an IMAX 3-D release.

We don't currently have any plans to do any 3-D releases.

(OPERATOR INSTRUCTIONS).

Jeff Logsdon, Harris Nesbitt.

Steve, a question for you.

It appears that it is more of a philosophical question or personal question, but it appears that during 2005 your ownership level is going to go below 50 percent as options are exercised.

Does that change any of your thinking at all, or are you happy with your share ownership levels where they are?

You have never really done anything with the stock you own?

Well, I have done a lot with it.

I have held onto it, and it continues to appreciate.

Isn't that would you guys do?

We do not get to own your stock.

We suffer.

I can tell you there is nothing that delights me more than to be a rewarding or incredible talent at Pixar with stock options and to see them appreciate, and even though a part of that equation means that I get diluted some, I would rather own a slightly smaller slice of a bigger pie.

So I am thrilled, and my stock ownership of the Company will still hover around half, and I could not be more delighted.

Second question.

Simon, perhaps could you just outline for us once again facilities-wise what is going on with either expanding or extending your existing facilities and what that capacity is being used for or anticipated to be used for?

Well, as you know, we got approval from the city for a long-term expansion of the campus in Emeryville.

At the moment, we are just looking at what those options might be in terms of additional buildings.

Did you lease some facilities?

We do currently lease some facilities because we outgrew the main building some time ago.

Steve Lidberg, Pacific Crest Securities.

Steve, I was hoping you could comment on the competitive environment in animation.

Obviously a number of other studios pursuing various initiatives, and how is that impacting your ability to attract talent?

Thanks.

Well, there are a bunch of folks making animated feature films now, and certainly you can fill up one hand with them, which is terrific.

We think a healthy animation industry helps us all.

We are very fortunate in that for quite some time we have been able to attract the best talent in the industry, both technical talent and creative talent, and that has not diminished with the advent of some new competitors.

We are still able to hire the best.

The best want to be at Pixar and work with the rest of the best.

So we're very lucky and fortunate to be in this position, and we see nothing that is going to change in the foreseeable future.

And where was headcount at the end of the quarter?

It was around 770.

Michael Savner, Banc of America.

I just wanted two quick follow-ups.

Simon, can you give us a little bit more detail on the delta between the reversal on the Nemo reserve?

You said it was more than you expected, but can you quantify what was built into the number?

Was all 22x million upside to what you had expected, or what was your number so we can figure out what the upside relative to what was in the number?

And then second for Steve, you know you have made it clear that you want to hold onto your cash reserve until you have a new distribution deal in place.

It makes sense.

But assuming you still have a large cash cushion, would you look to do acquisitions to maybe vertically integrate some of the consumer products that have been so successful and will likely continue to be in the future?

Thanks.

Michael, let me take the first part.

As I said in the note, the reduced domestic home video return reserve and lower marketing costs were around 22 cents per share.

I cannot comment on what our projections were.

And in terms of the cash, again one of the great things having some cash and no debt affords you is options.

So I think we're real focused on selecting a partner for our future over the next year, and after that, you know I think we will have a lot of options.

Thank you.

At this time, speakers, I will turn the conference back over to you.

I would like to thank you all for participating in what has been a very enjoyable quarter and year.

We will talk to you next quarter.

Thanks.

Ladies and gentlemen, today's conference is being made available for replay starting today at 8:30 PM Eastern time and running for one week until February 17.

You may access the AT&T Replay Service by dialing 1-800-475-6701 and entering the access code of 765599.

Internationally you may access our Replay Service by dialing 320-365-3844. (Repeats numbers.)

That does conclude your conference for today.

We thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.